Investigation

Inside the Code of Conduct, the EU's most secretive group

For the last six months, the EU's fight against tax havens has been in the hands of one of Brussels' most secretive groups, the so-called Code of Conduct.

Somewhere in the Justus Lipsius or the Europa, the Council of the EU's buildings, the group of experts is examining the tax regimes of 92 countries around the world, in order to draft the first-ever EU "blacklist" of countries with too permissive rules.

Don't miss out on

Why join?

Luxembourg. The Code of Conduct failed to implement the exchange of information that could have helped stop tax rulings. (Photo: wehereisemil)

The work has been divided between subgroups of national officials, who are expected to hand in their report in September.

In the meantime, the main group is working on more general issues, such as the sanctions against tax havens or the process for removing a country from the future blacklist.

The final blacklist is expected to be adopted around the end of the year.

"It's a very big task," one member of the group told EUobserver. "We work full-time on it - we don't have time to do our usual work anymore."

The Code of Conduct's "usual work" consists of reviewing national tax legislation to find out if they can be deemed "harmful" to tax fairness and EU tax competition.

Created in 1998, this informal group of national tax officials meets in Brussels 2 or 3 times per semester, a 6-month period.

Its mandate stresses that its work should be confidential. Only the list of the next meetings and laconic reports are published every six months, and little is known about the content of the discussions.

“Don't expect animated debates, nor tense discussions," said one participant. “It's rather lengthy and formal, with national officials talking in turn about their tax schemes”.

Sources stressed that the talks are extremely technical, with detailed discussions about the precise set-up of each scrutinised tax regime.

The Code of Conduct was initially "a very high-level political body," Alain Lamassoure, a centre-right MEP who was a member of the group whilst serving as France's budget vice-minister, told EUobserver.

"The goal was to have a first step towards tax harmonisation," he said.

But the Code of Conduct has become increasingly technical over the years. It is now attended by experts more than high-level officials, and ministers tend to stay away from it.

"Nowadays, there is no more direct link between the officials in the group and their respective finance ministers," said one source who follows the talks.

The Code of Conduct has a specific governance structure. It has a dedicated president, currently Italy's Fabrizia Lapecorella, but relies on the general secretariat of the Council of the EU.

Because of its informal nature, the Code of Conduct does not take any formal decisions. It only works through what amounts to peer pressure, convincing each member to rollback whichever measures are deemed harmful.

Participants in the Code of Conduct, and also EU sources following the talks, describe the group as successful. According to an European Commission source, the body has dealt with 400 national measures in 20 years, out of which around 100 were assessed as potentially harmful.

Participants in the discussions say that the wide majority of the measures assessed as harmful were amended by member states. They insist that this was possible only because of the confidential nature of the discussion.

"You get more fruitful discussions behind close doors," a Code of Conduct source said. "Taxation is a very sensitive issue. It is important for member states to speak freely," added another.

Non-transparent

Last year, the European Parliament's special "LuxLeaks" committee, which investigates the revelations from Luxembourg's tax rulings, required access to Code of conduct documents.

The developments surrounding the tax rulings in the Grand Duchy were partly made possible by the Code of Conduct's failure to put in place the exchange of tax rulings between member states - as required by an EU directive on administrative cooperation.

However, MEPs from the committee were only allowed to read the documents in a specific room in the European Commission, where they were unable to take notes or pictures.

That was already too much for some member states, which began to realise that minutes or discussion papers could be circulated outside the group.

"The discussions in the group are now less open and less frank, because participants envisage the subsequent publication of the documents," a Code of Conduct participant told EUobserver.

Strong power

The lack of transparency also applies to the work on the tax haven blacklist.

The subgroups' report, due in the autumn, will not be published and no information will be given until the final list is adopted.

Even the main group has asked not be updated, in order to limit the risk of leaks or of access request from MEPs, according to a source.

"It is very difficult to know what is happening in this blacklisting process,' Aurore Chardonnet, an EU tax policy adviser at Oxfam, told EUobserver.

"You don't know which member states are blocking it or pushing it forward. It is handled as technical, but it is a very political issue."

“This is unacceptable," added Elena Gaita, policy officer in charge of corporate transparency at Transparency International. She noted that despite being an informal group, the Code of Conduct "has a strong power, especially with this blacklist exercise."

But Code of Conduct members point out that establishing the blacklist is "a very sensitive exercise".

"We need full confidentiality," said one source, while another suggested that more transparency would only shift meaningful discussions to bilateral sideline meetings.

Mandate reform

The Code of Conduct is also pondering whether it should reform its mandate, to better tackle tax competition.

For now, the group's mandate does not allow for addressing direct fiscal competition between member states - for instance, the fact that some of them have a much lower rates than others.

The group can only look at individual national schemes, by comparing whether they offer more favourable conditions than the normal tax regime of the same countries.

France, a country that has a high 33.3-percent corporate tax rate, thinks it is not fair.

The issue came to light in November 2016, when the Code of Conduct declared that the French patent box - a tax scheme allowing a 15 percent tax rate for corporate profits related to intellectual property - was in "contravention" to the EU guidelines.

Paris said that the rate was higher than in other EU countries, such as Ireland's 12 percent rate, and that its 15 percent could therefore not be assessed as unfair tax competition.

Reforming the group's mandate, however, would require the unanimous agreement of finance ministers.

In their last discussion on the issue in 2015, some countries, including France, tried to task the group with checking whether all corporate profits in the EU could be taxed.

This was strongly opposed by some other member states, especially Cyprus and Ireland, on the grounds that it would be the first step towards a common EU-wide tax rate - something the EU is not competent to legislate on.

The discussion is still going on "in the background" because of the blacklisting process, a member of the group noted. "We know that the mandate is outdated, and we will have to adapt it".